The Company is a worldwide manufacturer of filtration systems and replacement parts. The Company's product mix includes air and liquid filtration systems and exhaust and emission control products. Products are manufactured at 40 plants around the world and through three joint ventures.

The Company has two reporting segments: Engine Products and Industrial Products. Products in the Engine Products segment consist of air filtration systems, exhaust and emissions systems, liquid filtration systems and replacement parts. The Engine Products segment sells to original equipment manufacturers (OEMs) in the construction, mining, agriculture, aerospace and defense, and transportation markets and to independent distributors, OEM dealer networks, private label accounts and large equipment fleets. Products in the Industrial Products segment consist of dust, fume and mist collectors, compressed air purification systems, liquid filtration systems, intake air filtration systems for gas turbines, and specialized air filtration systems for diverse applications including computer hard disk drives. The Industrial Products segment sells to various industrial end-users, OEMs of gas-fired turbines and OEMs and end-users requiring clean air and liquids.

The following discussion of the Company's financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto and other financial information included elsewhere in this report.

Overview

The Company reported diluted net earnings per share of $0.34 for the third quarter of Fiscal 2009, down from $0.57 in the third quarter of the prior year. Net income for the quarter was $26.6 million, compared to $46.0 million in the third quarter of the prior year. The impact of foreign currency translation decreased reported net earnings by 2.0 percent in the quarter. The Company reported sales in the third quarter of Fiscal 2009 of $413.4 million, a decrease of 29.7 percent from $587.8 million in the third quarter of the prior year. The impact of foreign currency translation decreased reported sales by 5.7 percent in the quarter

Although the Company continued to experience very challenging and severe recessionary conditions in almost all of its end markets and geographic locations, gross margin improvement, cost reductions, and working capital improvement projects helped in the third quarter.

The Company generated cash flow from operations of $110.9 million in the third quarter of Fiscal 2009 and $204.7 million year-to-date. This allowed the Company to further reduce debt by $39 million this quarter while increasing global cash reserves.

The Company's overall sales were down 30 percent in the quarter and, excluding the exchange rate movements impact, sales were down 24 percent. In the Company's Engine Products segment, local currency sales decreased 26 percent, although its sales of retrofit emissions and aerospace and defense products remained ahead of last year's levels. In the Company's Industrial Products segment local currency sales decreased 21 percent as its Industrial Filtration Solutions Products, Gas Turbine Systems Products, and Special Applications Products product groups all experienced sales declines. Market conditions were weak globally as local currency sales decreased by 17 percent in Asia, 22 percent in the Americas, and 32 percent in Europe.

The Company's operating margin improved in the third quarter to 9.1 percent, compared to 6.0 percent in the second quarter, despite these sudden and sharp sales declines in many of its businesses. The Company continued to proactively expand its restructuring actions. As a result, it incurred $6.8 million of restructuring costs in the quarter and $11.1 million year-to-date, while realizing savings of approximately $20 million from the restructuring actions completed in the second and third quarters. These restructuring actions included further headcount reductions of 850 employees in the third quarter for a total work force reduction of 2,700, or 20 percent, since the beginning of the fiscal year. The Company anticipates that the cumulative affect of the restructuring actions during Fiscal 2009 will generate approximately $100 million of annualized pre-tax cost savings when completed. Approximately 60 percent of these cost savings relate to cost of sales and 40 percent relate to operating expenses.

Results of Operations

All major regions in which the Company operates have been impacted by the global recession. Sales in the United States decreased $61.8 million or 25.6 percent for the third quarter of Fiscal 2009 compared to the third quarter of the prior year. Total international sales in U.S. dollars decreased $112.5 million or 32.5 percent in the third quarter compared to the prior year. In U.S. dollars, Europe sales decreased $85.0 million or 42.0 percent, Asia sales decreased $25.8 million or 21.8 percent and other international sales decreased $0.2 million or 6.8 percent for the third quarter of Fiscal 2009 as compared to the prior year period. Translated at constant exchange rates, total international sales decreased 22.8 percent over the prior year quarter. For the nine month period ended April 30, 2009, sales in the United States decreased $46.0 million or 7.0 percent from the prior year, and total international sales in U.S. dollars decreased $131.8 million or 13.6 percent from the prior year.

The impact of foreign currency translation during the third quarter of Fiscal 2009 decreased sales by $33.6 million, or 5.7 percent. The impact of foreign currency translation on the year-to-date results as of the third quarter of Fiscal 2009 decreased sales by $54.2 million. Worldwide sales for the third quarter of Fiscal 2009, excluding the impact of foreign currency translation, decreased 23.9 percent from the third quarter of the prior year. The impact of foreign currency translation decreased net income by $0.9 million and $2.9 million for the three and nine month periods of Fiscal 2009, respectively.

Although net sales excluding foreign currency translation and net earnings excluding foreign currency translation are not measures of financial performance under GAAP, the Company believes they are useful in understanding its financial results. Both measures enable the Company to obtain a clearer understanding of the operating results of its foreign entities without the varying effects that changes in foreign currency exchange rates may have on those results. A shortcoming of these financial measures is that they do not reflect the Company's actual results under GAAP. Management does not intend these items to be considered in isolation or as a substitute for the related GAAP measures.

Following is a reconciliation to the most comparable GAAP financial measure of this non-GAAP financial measure (thousands of dollars):

                                        Three Months Ended            Nine Months Ended
                                             April 30,                    April 30,
                                        2009           2008          2009           2008

Net sales, excluding foreign
currency translation                 $   447,092    $  550,798    $ 1,501,529    $ 1,540,451
Foreign currency translation             (33,645 )      36,962        (54,221 )       84,648
Net sales                            $   413,447    $  587,760    $ 1,447,308    $ 1,625,099

Net earnings, excluding foreign
currency translation                 $    27,505    $   43,136    $   111,229    $   113,761
Foreign currency translation                (907 )       2,851         (2,876 )        9,619
Net earnings                         $    26,598    $   45,987    $   108,353    $   123,380

Gross margin for the third quarter of Fiscal 2009 was 31.6 percent compared to 32.0 percent for the third quarter in the prior year. Lower absorption of fixed costs due to the drop in production volumes negatively impacted gross margin by $14.6 million. The Company had $1.9 million in restructuring costs which reduced gross margin in the quarter, partially offset by $1.1 million of lower incentive compensation expense as compared to the prior year period. The Company also benefited from improved product mix and the shipment of a few higher margin projects in the Industrial Products segment, and salary savings as a result of the earlier workforce reductions. During the second quarter of Fiscal 2008, the Company began utilizing a new warehouse management system at its main U.S. distribution center. The Company encountered issues during the transition to the new system which resulted in approximately $3.6 million and $5.7 million in incremental distribution charges for the three and nine months ended April 30, 2008.

Operating expenses during the third quarter of Fiscal 2009 were $93.1 million, or 22.5 percent of sales, compared to $124.7 million, or 21.2 percent of sales, in the prior year period. Operating expenses as a percent of sales increased due to sales volume declines and $4.9 million in restructuring cost during the quarter, partially offset by the benefits from previous restructuring actions taken and $9.0 million of lower incentive compensation expense as compared to the prior year period. Year-to-date operating expenses were 21.9 percent of sales, up from 21.3 percent in the prior year, due to the decline in sales partially offset by the benefit of the restructuring actions.

Other income for the third quarter of Fiscal 2009 totaled $1.8 million, compared to $2.6 million of other income in the third quarter of the prior year. Other income for the third quarter of Fiscal 2009 consisted of income from unconsolidated affiliates of $1.3 million, royalty income of $1.2 million, interest income of $0.2 million, foreign exchange losses of $0.2 million and other miscellaneous expenses of $0.7 million. For the third quarter of Fiscal 2009, interest expense was $4.1 million, slightly down from $4.2 million in the third quarter of the prior year. Year-to-date, other income totaled $7.5 million compared to $4.6 million reported in the prior year. Year-to-date interest expense was $13.1 million, up from $12.6 million in the prior year.

The effective tax rate for the three months ended April 30, 2009 was 24.8 percent, compared to a prior year rate of 25.6 percent. The effective tax rate for the nine months ended April 30, 2009 and 2008 was 16.4 percent and 27.4 percent, respectively. The nine months ended April 30, 2009 contains $19.3 million of discrete tax benefits, $2.6 million of which occurred this quarter, while the rest predominantly occurred in the second quarter. These amounts are related to the effective settlements of long-standing court cases and examinations in various jurisdictions for tax years 2003-2006, the reassessment of the corresponding unrecognized tax benefits for the subsequent open years and a favorable resolution in the third quarter of a foreign tax matter. The prior year nine month period contained $9.3 million of discrete tax benefits, which predominantly occurred in the first and third quarters, related to the expiration of statutes on previously unrecognized tax benefits and the reduction in deferred tax liabilities related to enacted foreign tax rate changes. Absent these items, the underlying tax rate for the Fiscal 2009 year-to-date period has decreased from Fiscal 2008 by 1.6 points to 31.3 percent. The reinstatement of the Research and Experimentation credit, changes in current year unrecognized tax benefits, reduced statutory tax rates and the mix of earnings between foreign jurisdictions all contributed to the reduction.

Operations by Segment

     Following is financial information for the Company's Engine Products and
Industrial Products segments. Corporate and Unallocated includes corporate
expenses determined to be non-allocable to the segments and interest income and
expense. Segment detail is summarized as follows (thousands of dollars):


                                        Engine       Industrial      Corporate and        Total
                                       Products       Products        Unallocated        Company

Three Months Ended April 30, 2009:
Net sales                             $  223,747    $    189,700                  -    $   413,447
Earnings before income taxes              19,708          18,448             (2,776 )       35,380

Three Months Ended April 30, 2008:
Net sales                             $  324,992    $    262,768                  -    $   587,760
Earnings before income taxes              43,456          25,997             (7,603 )       61,850

Nine Months Ended April 30, 2009:
Net sales                             $  774,614    $    672,694                  -    $ 1,447,308
Earnings before income taxes              66,252          70,439             (7,117 )      129,574
Assets                                   603,821         490,535            275,718      1,370,074

Nine Months Ended April 30, 2008:
Net sales                             $  902,488    $    722,611                  -    $ 1,625,099
Earnings before income taxes             115,279          70,429            (15,738 )      169,970
Assets                                   614,229         581,193            318,123      1,513,545

Following are net sales by product category within the Engine Products and Industrial Products segments (thousands of dollars):

                                        Three Months Ended            Nine Months Ended
                                             April 30,                    April 30,
                                        2009           2008          2009           2008
Engine Products segment:
Off-road Products*                   $    82,217    $  120,932    $   290,912    $   332,398
Transportation Products                   13,405        33,188         57,549         91,943
Aftermarket Products**                   128,125       170,872        426,153        478,147
Total Engine Products segment        $   223,747    $  324,992    $   774,614    $   902,488

Industrial Products segment:
Industrial Filtration Solutions
Products                             $   111,975    $  155,208    $   394,579    $   430,304
Gas Turbine Products                      45,166        58,858        162,046        149,046
Special Applications Products             32,559        48,702        116,069        143,261
Total Industrial Products segment    $   189,700    $  262,768    $   672,694    $   722,611

Total Company                        $   413,447    $  587,760    $ 1,447,308    $ 1,625,099

* Includes Aerospace and Defense products. ** Includes replacement part sales to the Company's original equipment manufacturer Engine Products Customers.

Engine Products Segment For the third quarter of Fiscal 2009, worldwide Engine Products sales were $223.7 million, a decrease of 31.2 percent from $325.0 million in the third quarter of the prior year. Total third quarter Engine Products sales in the United States decreased by 22.5 percent compared to the same period in the prior year and international sales decreased by 39.3 percent as discussed below. The impact of foreign currency translation during the third quarter of Fiscal 2009 decreased sales by $16.8 million, or 5.2 percent. Earnings before income taxes as a percentage of Engine Products segment sales of 8.8 percent decreased from 13.4 percent in the prior year. Year-to-date, worldwide net sales were $774.6 million, a decrease of 14.2 percent from $902.5 million in the prior year. International Engine Products sales decreased 20.6 percent and sales in the United States decreased 7.6 percent from the prior year on a year-to-date basis. The impact of foreign currency translation on the year-to-date results as of the third quarter of Fiscal 2009 decreased sales by $26.3 million, or 2.9 percent. Year-to-date, earnings before income taxes as a percentage of Engine Products segment sales of 8.6 percent decreased from 12.8 percent in the prior year. The Engine Products segment has been negatively impacted by lower absorption of fixed manufacturing costs due to the drop in sales volumes and increased costs related to restructuring, offset by lower operating expenses as a result of headcount reductions and the reassessment of incentive compensation.

Worldwide sales of Off-Road Products in the third quarter of Fiscal 2009 were $82.2 million, a decrease of 32.0 percent from $120.9 million in the third quarter of the prior year. Domestic sales in Off-Road Products decreased 16.9 percent. International sales were down 46.7 percent from the third quarter of the prior year with decreases in Europe and Asia of 47.2 percent and 46.7 percent, respectively. Spending in U.S. residential construction markets was down more than 30 percent over prior year, resulting in a decrease in the sales of the Company's products into those markets. In addition, mining activity has remained weak due to decreased commodity prices. Domestic Aerospace and Defense sales benefited from the recent acquisition of Western Filter Corporation, which resulted in $4.4 million of incremental sales over the prior year quarter, and continued strong demand for filters for military equipment. Sales to the European agricultural end market decreased significantly, as did sales in the European construction equipment end market associated with decreased construction activity due to the economic downturn. In Asia, sales have declined significantly in Japan in the construction end markets, offset slightly by foreign exchange gains. Year-to-date, worldwide Off-Road Products sales totaled $290.9 million, a decrease of 12.5 percent from $332.4 million in the prior year. Year-to-date sales of Off-Road Products decreased 1.4 percent in the United States and decreased 24.2 percent internationally over the prior year.

Worldwide sales of Transportation Products in the third quarter of Fiscal 2009 were $13.4 million, a decrease of 59.6 percent from $33.2 million in the third quarter of the prior year. International Transportation Products sales decreased by 63.3 percent driven by decreased sales in Europe and Asia of 71.4 percent and 55.7 percent, respectively, reflecting the current economic downturn for freight activity and truck build rates. Sales decreased in the United States by 56.6 percent primarily as a result of a 50 percent decrease in Class 8 truck build rates and a 53 percent decrease in medium duty truck build rates by the Company's Customers over the prior year quarter. Year-to-date, worldwide Transportation Products sales totaled $57.5 million, a decrease of 37.4 percent from $91.9 million in the prior year. International Transportation Products sales decreased 32.8 percent from the prior year on a year-to-date basis. Transportation Products sales in the United States decreased 41.1 percent from the prior year on a year-to-date basis as a result of the rapid deceleration of economic conditions and low truck build rates.

Worldwide sales of Aftermarket Products in the third quarter were $128.1 million, a decrease of 25.0 percent from $170.9 million in the third quarter of the prior year. U.S. Aftermarket Products sales decreased 18.8 percent driven by inventory adjustments by the Company's Customers and decreases in equipment utilization rates in the mining, construction and transportation industries, partially offset by increases in retrofit emission sales of $1.3 million in the quarter. International sales were down 30.5 percent from the prior year quarter, primarily driven by sales decreases in Europe of 40.7 percent, due to continued weak economic conditions in Europe, and in Asia of 20.5 percent, due to softness in most of the end markets offset by marginal growth in China. Year-to-date, worldwide Aftermarket Products sales totaled $426.2 million, a decrease of 10.9 percent from $478.1 million in the prior year. Year-to-date Aftermarket Products sales decreased 4.7 percent in the United States and decreased 16.3 percent internationally over the prior year.

Industrial Products Segment For the third quarter of Fiscal 2009, worldwide sales in the Industrial Products segment were $189.7 million, a decrease of 27.8 percent from $262.8 million in the third quarter of the prior year. Total third quarter international Industrial Products sales were down 26.1 percent compared to the same period in the prior year, while sales in the United States decreased by 31.5 percent. The impact of foreign currency translation during the third quarter of Fiscal 2009 decreased sales by $16.8 million, or 6.4 percent. Earnings before income taxes as a percentage of Industrial Products segment sales decreased to 9.7 percent from 9.9 percent in the prior year. Lower earnings were driven by lower sales volumes and additional costs related to restructuring, partially offset by improvements in distribution efficiency and cost control measures. Year-to-date, worldwide net sales were $672.7 million, down 6.9 percent from $722.6 million in the prior year. International Industrial Products sales decreased 7.4 percent and sales in the United States decreased 5.7 percent from the prior year on a year-to-date basis. The impact of foreign currency translation on the year-to-date results lowered sales by $27.9 million, or 3.8 percent. Year-to-date, earnings before income taxes as a percentage of Industrial Products segment sales of 10.5 percent increased from 9.7 percent in the prior year. This earnings improvement over the prior year was driven by an increase in plant utilization due to higher volumes in the Industrial Filtration Solutions Products business during the first quarter, the impact of cost control measures including lower incentive compensation expense, and improvements in distribution efficiency over the prior year.

Worldwide sales of Industrial Filtration Solutions Products in the third quarter were $112.0 million, a decrease of 27.9 percent from $155.2 million in the prior year. International sales decreased 24.8 percent over the prior year with sales in Europe decreasing 33.4 percent and Asia sales decreasing 6.8 percent. Excluding foreign currency, international sales decreased 13.0 percent. The continued decline in Europe was due to reduced demand for industrial dust collectors and compressed air purification systems which fell with the downturn in general manufacturing activity during the quarter. In Asia, local currency sales remained relatively constant as a result of the shipment of several large dust collection systems offset by foreign exchange. North American general industrial activity also declined as evidenced by a 69 percent drop in machine tool consumption in the United States. Domestic sales decreased 33.4 percent over the prior year quarter as a result of this decline in general industrial activity. The results in the quarter were also influenced by the sale of the air dryer business in Maryville, Tennessee, on October 31, 2008, which decreased sales $2.2 million over last year. Year-to-date, worldwide sales of Industrial Filtration Solutions products were $394.6 million, down 8.3 percent from $430.3 million in the prior year. International Industrial Filtration Solutions product sales decreased 6.8 percent from the prior year on a year-to-date basis. Sales in the United States decreased 11.4 percent from the prior year on a year-to-date basis.

Worldwide sales of the Company's Gas Turbine Products in the third quarter were $45.2 million, a decrease of 23.3 percent from sales of $58.9 million in the third quarter of the prior year. A slowdown in Customer demand for large gas turbine power generation projects has begun to impact the Company's sales. The Company's Gas Turbine Products sales include large systems and as a result shipments and revenues can fluctuate from quarter to quarter. Year-to-date, worldwide Gas Turbine Products sales were $162.0 million, up 8.7 percent from $149.0 million in the prior year.

Worldwide sales of Special Application Products in the third quarter were $32.6 million, a decrease of 33.1 percent from $48.7 million in the prior year period. Domestic Special Application Products sales decreased 32.1 percent. International sales of Special Application Products decreased 33.3 percent over the prior year. The primary decreases internationally were in Asia and Europe, which decreased 28.3 and 55.4 percent, respectively, due to a significant reduction in demand for hard disk drives and semiconductor fabrications based on a worldwide contraction in the end markets for computers, data storage devices and other electronic products. Demand for PTFE membrane filtration products was also down this quarter. Year-to-date, worldwide Special Application Products sales were $116.1 million, a decrease of 19.0 percent from $143.3 million in the prior year, primarily driven by an international Special Application Products sales decrease of 33.3 percent over the prior year.

Liquidity and Capital Resources

The Company generated $204.7 million of cash from operations during the first nine months of Fiscal 2009. Operating cash flows increased by $100.9 million from the same period in the prior year, primarily as a result of decreases in accounts receivable and inventory balances which resulted in $143.5 million and $94.8 million of additional cash flow from operations as compared to the prior year, respectively, partially offset by decreases in accounts payable and accrued compensation of $81.4 million and $20.1 million, respectively. In the first nine months of Fiscal 2009, operating cash flows, additional borrowings and cash on hand were used to support $34.2 million in capital additions, the acquisition of Western Filter Corporation for $78.5 million, the repurchase of 0.8 million outstanding shares of the Company's common stock for $32.8 million and the payment of $26.3 million in dividends. For additional information regarding share repurchases see Part II Item 2, "Unregistered Sales of Equity Securities and Use of Proceeds."

At the end of the third quarter, the Company held $133.2 million in cash and cash equivalents, up from $83.4 million at July 31, 2008. Short-term debt totaled $75.8 million, down from $139.4 million at July 31, 2008, primarily as a result of the long-term debt issued in November 2008 and cash generated from operations. The amount of unused lines of credit as of April 30, 2009 was approximately $527.0 million. Long-term debt of $253.2 million at April 30, 2009 increased from $176.5 million at July 31, 2008. The increase in long-term debt is a result of the issuance of an $80.0 million senior unsecured note on November 14, 2008 at an interest rate of 6.59 percent due November 14, 2013. Long-term debt represented 26.4 percent of total long-term capital, defined as long-term debt plus total shareholders' equity, compared to 19.3 percent at July 31, 2008.

The Company has not made and does not anticipate making any contributions to its U.S. pension plans for the remainder of Fiscal 2009, and estimates that it will contribute up to an additional $8.2 million to its non-U.S. pension plans during the remainder of Fiscal 2009. The drops in the fair value of plan assets since the market uncertainties and declines began in the first quarter of Fiscal 2009, may result in an increase in the pension liability component of other comprehensive income and a potential increase in Fiscal 2010 pension expense and expected plan contributions to the extent the effects are not offset by a change in discount rates at the time of the annual pension measurement on . . .